How to tap into the equity in your property: guide to additional mortgage borrowing

Hannah Salih

21 May 2019

If you need to fund a project like a home renovation then you might be able to tap into the equity you have in your property to get access to some cash

We hate to state the obvious, but buying a house is expensive. Most of us will need a mortgage to cover it, which means until it's paid off you don't completely own the entire value of the house. But the value of what you do own outright is known as your equity.

Even if you haven't fully paid off your mortgage, your home is usually one of the biggest assets that you have. But because the value of what you do own (your equity) is tied up in the bricks and mortar it's not easy to turn into cash that you can spend.

However, there is a way you can release some of your equity (and get that money in your bank account) without selling up. It might come as a surprise, but you can actually get access to your equity simply by remortgaging for a higher amount than is left on your current mortgage.

This will mean you'll switch to a new mortgage deal and in the process free up a lump sum that you can use however you wish. Many people use this cash as a way to buy a second property, start a business or renovate.

Wait a minute - what’s equity?

Equity is one of those terms that financial firms love to throw around, without always explaining precisely what it means. In its most basic sense, the equity in your home is the amount that you own outright, without a mortgage hanging over the top of it.

It’s easiest to explain through an example. Let’s say you buy a home for £200,000, with a £20,000 deposit and a £180,000 mortgage. At this point, you own £20,000 equity in the property and the other 90% of the value of your house is covered by the mortgage (and this would mean your Loan To Value would be 90%).

The idea is that as you pay off your mortgage, the equity you own in the property goes up. So if after a few years the property is still worth £200,000 and you've paid a further £10,000 towards your mortgage (meaning you now owe £170,000), then you have increased the amount of equity you own to £30,000.

Releasing equity by remortgaging

When your initial fixed rate or tracker rate comes to an end, then it can often be a good idea to remortgage. This is basically where you transfer the outstanding debt from one lender to another. The main reason most people remortgage is to get a cheaper rate, and so cut the size of their monthly repayments.

However, if you have built up some equity in the property then you could actually release some of it when remortgaging, which you can then spend on whatever project you have in mind.

Let's continue our example to show how it works. Say that you've lived in your house for a few years and are now looking to release some of the equity you've built up. In those years:

The property you bought has rocketed in value since you got the keys, and is now worth £300,000 rather than the £200,000 you bought it for.

In this example, you have £130,000 equity in the property (£300,000 minus £170,000).

If you are simply looking to remortgage to find a cheaper rate, then the amount you would look to borrow would be £170,000. This works out at around 57% loan-to-value, much lower than the 90% loan-to-value that you initially borrowed at. This is important as the best interest rates are reserved for the lowest loan-to-values, meaning you will likely see a significant reduction in the size of both your monthly repayments and how much you owe overall.

But the equity you own in the property has grown substantially since that initial purchase. By remortgaging for a higher amount than you actually owe on your existing home loan, you can release some of that equity you have built up.

So let’s say instead of remortgaging at £170,000 you remortgage for £190,000. The first £170,000 of that goes towards paying off the initial mortgage, leaving you an additional £20,000 to use as you please. You’ll still have £110,000 equity in the property to boot (£130,000 minus the £20,000 you've released).

This also leaves you with a loan-to-value of around 63% which is much lower than the 90% you initially started with. So even though your total mortgage amount has increased, you may still get a deal with cheaper monthly repayments than you started off with.

How much can I borrow?

This is always a huge question for any mortgage borrower, but there isn’t a simple answer. Lenders will run the rule over your financial circumstances, covering everything from your salary to your regular outgoings, to work out what they would feel comfortable lending to you.

This will vary between lenders though. Some have calculators on their websites which can give you a rough outline of what they might give you, but a mortgage broker will likely be able to give you a much more detailed idea of just what sort of sums you can borrow.

Is this the right option for me?

If you are tempted to tap into the equity you have built up in your home, then it’s important to think carefully about just what you want that money for. There are lots of different reasons people do this, from home improvements to buying an investment property and even getting the starting capital together to start their own business.

Do you have any other funding options? For example, could you use savings instead - it’s generally a better idea to use the money at your disposal rather than increase your debt if you can.

Alternatively, you might prefer to use a personal loan rather than increase the size of your home loan. This may work out much cheaper in the long run. Even if your mortgage rate is low, the sheer amount of time it takes to pay it off means that it can end up being an expensive way to borrow this cash compared to other options.

But while you should be cautious it can also have its benefits. For starters, you have the general benefit of remortgaging to a better deal meaning lower interest rates which can save you money in the long run. The big benefit is pretty evident, by releasing some of your equity lets you get access to a chunk of money which you can invest elsewhere.

If you're unsure, it's often a good idea to discuss your situation with a mortgage broker. They have expert insight on which lenders are most likely to be happy lending to someone in your position and can help you find the right deal for you. You can find a good mortgage broker in your area using the Unbiased website or you can connect to a free mortgage broker directly through your ClearScore.

by Hannah Salih

Hannah reads all the finance info on the web so you don't have to. She knows all there is to know about your finances but still spends all her money on brunch.

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